Fitch upgrades Pakistan’s credit rating after years

ISLAMABAD: Global credit ratings agency Fitch has upgraded Pakistan’s long-term foreign currency issuer default rating (IDR) from ‘CCC+’ to ‘B-’, marking the first improvement in several years and signalling renewed confidence in the country’s economic direction.

According to Finance Ministry, the revision reflects a stabilisation in Pakistan’s financial outlook. Fitch has also maintained a “stable outlook” for the long-term rating, suggesting no immediate risk of further downgrades.

Welcoming the development, Finance Minister Senator Muhammad Aurangzeb said the upgrade demonstrates international confidence in Pakistan’s ongoing economic reforms and policy direction.

“This upgrade from Fitch is a strong endorsement of our economic policies. It shows trust in our structural reforms and our vision for long-term economic stability,” said the minister.

He added that Fitch’s decision would further bolster the government’s economic agenda, paving the way for increased investment, trade, employment opportunities, industrial growth, and access to financial resources.

“This will enhance global confidence in Pakistan, encouraging further engagement from rating agencies, investors and financial institutions,” Aurangzeb remarked, reiterating the government’s commitment to continue its reform process.

The finance minister expressed optimism that the country’s economy would see further improvement and stability in the near future.

Fiscal Consolidation, External Stabilisation

In its commentary, Fitch said the upgrade was driven by Pakistan’s recent progress in narrowing its budget deficit and implementing structural reforms, which have supported IMF programme performance and bolstered funding availability. The agency also noted the role of tight economic policies in supporting the recovery of foreign exchange reserves and containing external vulnerabilities.

Policy Credibility Gradually Rebuilt

The agency highlighted the staff-level agreement reached in March between Pakistan and the IMF on the first review of its $7 billion Extended Fund Facility and the launch of a $1.3 billion Resilience and Sustainability Facility. Fitch said Pakistan had shown strong performance on key quantitative benchmarks, particularly in building reserves and achieving a primary budget surplus, although tax revenue growth had fallen short of targets.

Fiscal Performance Improving

Fitch forecast Pakistan’s general government budget deficit to fall to 6% of GDP in the current fiscal year ending June 2025, from nearly 7% in FY24, and to 5% in the medium term. The primary surplus is expected to more than double, reaching over 2% of GDP this fiscal year.

Downward Debt Trajectory

Government debt has also begun to decline, falling to 67% of GDP in FY24 from 75% the year before. While this is still above the average for similarly rated countries, Fitch said a gradual downward trajectory is expected, supported by tighter fiscal policy and lower interest rates.

Lower Inflation, Economic Stability

Inflation, a key pressure point in recent years, is forecast to ease significantly, with consumer prices expected to rise by just 5% in FY25, compared to over 20% in the past two years. Economic growth, meanwhile, is projected to edge up to 3%.

External Deficit Contained

Fitch also pointed to improvements in Pakistan’s external position, noting a current account surplus of $700 million during the first eight months of FY25. Gross foreign exchange reserves reached nearly $18 billion in March, up from less than $8 billion in early 2023.

Despite these positive trends, the agency cautioned that Pakistan still faces substantial external financing needs, with $9 billion in debt maturities due in FY26. Political uncertainty and security challenges also remain potential risks to reform implementation, particularly with a weak post-election mandate and ongoing unrest in some regions.

ESG – Governance

Fitch maintained that Pakistan’s ESG (environmental, social and governance) risks continue to weigh on the credit profile, citing concerns about political stability, rule of law, and institutional quality.

“Pakistan has an ESG Relevance Score of ‘5’ for both political stability and rights and for the rule of law, institutional and regulatory quality and control of corruption, as is the case for all sovereigns. These scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model (SRM). Pakistan has a WBGI ranking at the 22nd percentile.”